Amazon Optimizes Warehouse Space

As the holiday buying season is underway, Amazon is revising its warehousing system.

As we previously shared, in an effort to cut Prime shipping time from two days to one day the company invested heavily in 2nd quarter 2019 to improve transportation and warehousing. Part of the warehousing problem relates to independent merchants that are using Amazon for fulfillment. Over half of Amazon sales are from these independent merchants.

Amazon has raised the fees charged to these independent merchants to encourage a reduction in inventory, trying to keep slow-moving items out of their distribution centers. Because many of these merchants are concerned about the fees, Amazon may not have enough inventory on-hand with holiday sales looming.

Thus, Amazon is implementing Amazon Storage and Replenishment. Merchants can now store products to replenish Amazon’s distribution centers from nearby warehouses. The hope is to allow merchants a cheaper storage option in order to keep inventory low in Amazon’s distribution center, but yet not run-out of merchandise that might result in lost sales.

Guidance: By making less expensive, lower tech warehousing available to independent merchants, Amazon should increase the amount of inventory close to its distribution centers, which in turn should reduce stockouts and help Amazon meet its new one-day shipping goals.

2. Will this reduce the overall transportation and distribution cost?

Guidance: It will reduce the costs associated with stockouts that result from having low inventory levels on hand. However, it will add additional handling of merchandise as one more stop is added along the distribution process. The inventory must go into and out of the low-tech warehouses. Moreover, more inventory will now be sitting in these low-tech warehouses—adding storage and opportunity costs. The intention is that increased costs for additional storage and added inventory will be offset by the decrease in stockout costs such as lost sales.